Possible Changes to the Canadian Personal Property Security Acts 2000

Section 20 – Subordination of Unperfected Security Interests

20.(1) [Alternative A] Subject to subsection (1.1) a security interest in collateral is subordinate to the interest of:

(a) a person who causes the collateral to be seized pursuant to legal process to enforce a judgment, including execution, attachment or garnishment, or who has obtained a charging order or equitable execution that affects or relates to the collateral;

(b) a sheriff who has seized or has obtained a right to the collateral pursuant to The Creditors' Relief Act;

(c) where collateral has been seized under legal process, a judgment creditor entitled by law to participate in a distribution of money realized from the disposition of collateral subject to the interest of a person referred to in clause (a) pursuant to [The Creditors' Relief Act or equivalent legislation of the enacting jurisdiction];

and

(d) a sheriff [or equivalent officer] and a representative of creditors, but only for the purposes of enforcing the rights of persons mentioned in clause (a);

if that security interest is unperfected at the time when the interest of the person mentioned in clause (a) , (b) or (d) arises or the judgment creditor mentioned in clause (c) delivers a writ of execution or certificate to the sheriff pursuant to The Creditors' Relief Act.

20.(1) [Alternative B] Subject to subsection (1.2), an unperfected security interest in collateral is subordinate to the interest of:

(a) a judgement creditor who has registered a notice of judgment [or equivalent] in the Registry pursuant to [insert reference to relevant provincial judgment enforcement legislation] if the security interest is unperfected when the notice [or equivalent] is registered;

(b) all persons entitled by law to participate in a distribution of personal property which is subject to the interest of persons mentioned in clause (a); and

(c) a sheriff [or equivalent] and a representative of creditors for the purposes of enforcing the rights of persons mentioned in clause (a).

20(1.1) [Alternative A] Where a financing statement is registered when the interest of a judgment creditor mentioned in clause (1)(a) arises, a subsequently- perfected security interest referred to in the registration has priority to the extent of advances made without knowledge of the interest of the judgment creditor.

20(1.1) [Alternative B] Where a financing statement is registered when a notice of judgment [or equivalent] mentioned in clause (1)(a) is registered, a subsequently-perfected security interest to which the financing statement relates has priority to the extent of advances made without knowledge of the registration of the notice of judgment [or equivalent].

20.(2) A security interest in collateral is not effective against:

(a) a trustee in bankruptcy if the security interest is unperfected at the date of bankruptcy an assignment by or in respect of the debtor or a petition for a receiving order against the debtor under the Bankruptcy and Insolvency Act (Canada); or

(b) a liquidator appointed pursuant to the Winding-up Act (Canada) if the security interest is unperfected on the day that the winding-up order is made.

20.(3) [Alternative A] A security interest in goods, chattel paper, a security, a document of title, an instrument, an intangible or money is subordinate to the interest of a transferee who:

(a) acquires the interest pursuant to a transaction that is not a security agreement under which the transferee is not a secured party

(b) gives value; and

(c) acquires the interest without knowledge of the security interest before the security interest is perfected.

20.(3) [Alternative B] A security interest in goods, chattel paper, a security, a document of title, an instrument, an intangible or money is subordinate to the interest of a transferee who:

(a) acquires the interest pursuant to a transaction that is not a security agreement under which the transferee is not a secured party

(b) gives value; and

(c) acquires the interest without knowledge of the security interest before the security interest is perfected.

20.(4) For the purposes of subsection (3) a purchaser of an instrument, a security, or chattel paper, or a holder of a negotiable document of title who acquired the instrument, security, chattel paper or document of title in a transaction that was entered into in the ordinary course of the transferor's business has knowledge of the security interest only if the purchaser or holder acquired the security interest with knowledge that the transaction violates the terms of the security agreement that creates or provides for the security interest.

20.(5) For the purposes of this section, a security interest is unperfected unless the security agreement is enforceable pursuant to section 10.

COMMENT

1. The inclusion of alternatives A and B in section 20(1) and new section 20(1.1) reflects the fact that some PPSA jurisdictions have adopted registration of a notice of judgment (or judgment enforcement order) in place of (or in addition to) seizure of the collateral as the relevant priority point for assessing priority between a judgment creditor and an unperfected security interest under section 20(1).

1. The proposed changes to the wording of current clause 20(1)(c) would clarify that creditors who are entitled, under provincial creditors relief legislation, to participate in a distribution of property against which another creditor has completed enforcement proceedings, retain that entitlement in cases where the enforcing creditor would have priority over a security interest in the relevant property pursuant to subsection 20(1)(a) even if the security interest is perfected by the time such other creditors seek to exercise their participation rights. The proposed change does not prejudice the secured party in any way since the value of the priority right in the collateral enjoyed by the enforcing creditor remains unchanged. The only person ‘prejudiced’ by the proposed clarification is the enforcing creditor who, under the current wording, might otherwise be able to avoid sharing the fruits of its enforcement with other creditors as otherwise required by the creditors’ relief acts of the various provinces. The amended wording already appears in the Atlantic PPSAs.

1. The proposed new section 20(1.1) would allow a secured party who has registered a financing statement, but whose security interest does not attach until after registration, to enter into the security agreement and make advances without risk of subordination to an intervening judgment creditor otherwise entitled to priority under subsection (1). Priority for these advances would be conditioned on the secured party acting without actual knowledge of the intervening creditor’s interest. This change would reduce transaction costs and risk for secured parties without unduly inconveniencing judgment creditors. Under the current practice, a judgment creditor who contemplates judgment enforcement measures against collateral (in cases within alternative A), or who has filed a notice of judgment (in cases within Alternative B) has no means of knowing whether a previously filed financing statement reflects an attached or an unattached security interest. In order to ascertain their priority position under section 20, they must send a demand to the secured party pursuant to section 18. Moreover, in jurisdictions which have adopted Alternative B to subsection (1), it is already normal practice for judgment creditors to send notice of the registration of their judgments to all secured parties of record in order to crystallize their priority position in respect of subsequent advances by the secured party under section 35. (Note that the proposed changes would bring the Model Act into line with the policy already adopted on this point in the Newfoundland PPSA).

1. The noted change to section 20(2)(a) reflects a consequential change resulting from amendments made to the Bankruptcy and Insolvency Act since the PPSA was enacted. The concept of relation-back from the date of a receiving order to the date of the petition was deleted from the BIA and replaced with a new approach that focuses on "the date of the initial bankruptcy event." In order to maintain the same substantive result in section 20 notwithstanding the BIA amendments, it is necessary to replace the current reference to the date of bankruptcy in section 20 with a reference to the date of the initial bankruptcy event. It should be emphasized that this change is merely noted, it is not proposed. The amendments made to the BIA create an opportunity to reassess whether the date of filing a petition is the appropriate date for determining the priority position of a security interest in relation to the trustee in bankruptcy.

1. The proposed changes to section 20(3) address two matters.

1. First, as currently drafted, section 20(3)(a) would exclude from the operation of section a title retention sales contract between the debtor and a buyer since this would be a transaction that is a security agreement. This could not have been the intention of the drafters. A buyer under a conditional sales contract should be able to rely on the results of a registry search when buying. The proposed change addresses the problem. When the transferee is a secured party, the priority rules of the Act applicable to competing interests in the collateral resolve any conflict. However, when these rules do not apply because the transferee is other than a secured party, section 20(3) provides the applicable priority rule.

1. Two alternative versions of section 20(3) are presented to deal with the second issue. Under alternative A, the requirement that the buyer be without knowledge of the unperfected security interest is deleted. While this approach may seem radical, it should not be dismissed out-of-hand. It removes an incongruity in the current priority structure of the Act. It is clear that a secured party can gain priority by acquiring and perfecting a security interest with full knowledge of a prior unperfected security interest. The same is true of an execution creditor who can gain priority over an unperfected security interest even though the creditor grants credit and enforces his or her judgment with full knowledge of the security interest.

1. It should not be assumed that under the proposal a buyer could act with impunity. The buyer must act in good faith. While mere knowledge of a prior, unperfected security interest does not amount to bad faith, that knowledge along with a collusive agreement with the debtor to defeat the secured party’s interest would. The Committee of Governmental Experts on the Draft Convention on International Interests in Mobile Equipment (an international secured financing regime patterned in many respects on the PPSA) recently decided to adopt the approach proposed in Alternative B. A similar approach is taken in the ULC Uniform Liens Act. It has the great advantage of eliminating difficult problems of proof and of addressing situations in which the buyer, while being aware of a security interest in the goods being bought, honestly believes that the seller will discharge the security interest using the purchase price paid to him or her by the buyer.

1. Proposed section 20(4) already appears in the current Saskatchewan and Atlantic PPSAs but not in the other Acts. The purpose of the section is to approximate the position of a non-security transferee of an instrument, security or holder of a negotiable instrument under section 20(3) with the position of a transferee of the same type of property under section 31(4)-(6). Under the latter section, an ordinary course transferee takes free of the security interest even though the collateral was acquired with knowledge of it. In the absence of proposed section 20(4), a non-security transferee of property would be in a worse position when in competition with the holder of an unperfected security interest than a transferee of the property who is in competition with the holder of a perfected security interest. There can be no policy justification for this anomaly.

1. The changes proposed to section 31(7) below would approximate the priority position of a purchaser of chattel paper who takes possession of the chattel paper to that of a transferee of an instrument, security or the holder of a negotiable instrument under that section. This is why the reference to a purchaser of chattel paper appears in proposed section 20(4).

1. The explanation for proposed new subsection (5) is given in comments 8 and 9 to section 10 above.

Next Annual Meeting

2018 Conference (Centennial)

Delta Hotel

Québec City, QC

August 12 - 16, 2018